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Landlords Are Finding Security Deposit Alternatives

Families that can barely afford rent find it challenging to pay a security deposit and moving costs. As a result, fewer landlords are requiring an upfront deposit.

NEW YORK – Renters find that fewer places charge a security deposit – good news for tenants but a source of stress for landlords.

Security deposits have traditionally been a way for landlords to protect themselves if a resident causes property damage or stops making payments. But those large upfront moving costs can be problematic for tenants. Renters may spend more than $3,400 on total moving costs, according to research from Hotpads. With higher rent costs today, new tenants may already be stretched thin and a security deposit could even price them out.

Further, if a landlord takes any deductions from a security deposit when the tenant moves out, tensions often arise.

As such, some state and local governments are passing laws to limit security deposits. For example, Seattle has a law that limits security deposits to the equivalent of one month’s rent. New York state recently approved a similar bill.

But landlords still need some assurance that a tenant won’t bail on them or leave them a high cleanup bill once they move out.

Some landlords have started offering residents an opportunity to buy surety bonds instead of paying a security deposit. The renter pays a portion of the total deposit when they move in. That goes into a pool of funds to cover any damages or rent loss via a nonrefundable upfront fee. This allows renters to save money when they go to sign a new lease, but they still may have to pay more later on. If landlords find damages from the renter once they move out, the bonding company will pay to fix those damages and then require the renter to reimburse them.

Another alternative that landlords are turning to: lease insurance.

“With lease insurance, instead of paying a large sum of money for a security deposit, residents pay a monthly fee over the course of their leases,” writes Reichen Kuhl, CEO and co-founder of LeaseLock, whose company provides lease insurance. “As a result, the property owner is covered if the resident damages the property or skips their rent.”

Source: “A Disruptive Shift: The Death of the Security Deposit,” Forbes.com (Jan. 8, 2020)

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